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April 23, 2014

Two Reasons Why a New Wave of Breakaway Brokers Is On the Way

Growth in the registered investment advisor (RIA) channel has surged in recent years. Once derided by some as a temporary fad, independence has become the new normal for advisors considering the move from a wirehouse or other channels. The RIA model is ideal for those seeking greater autonomy in running their businesses, higher income potential, and the ability to have more personal relationships.

More than 4,000 advisors joined the RIA channel from 2008 to 2012, according to a 2013 Cerulli Report. Moreover, a full 90% of sophomore-year advisors that decided to go independent reported that they are now happier as an RIA, according to Schwab research. In fact, in that same research, part of the Charles Schwab Advisors Turning Independent series, most said that they wished they had made the move sooner.

What’s more, the next wave of advisors transitioning to independence is about to hit, thanks to two big trends: succession opportunities and lifestyle planning. We see senior wirehouse advisors are increasingly focused on these twin goals — and the RIA model can be a path that many of them take to get to the next stage in their careers.

Succession and Lifestyle Can Drive Change

The shift from a wirehouse model to independence is just beginning. We may continue to see many highly successful senior wirehouse advisors who are fast approaching traditional retirement age choose to become independent RIAs.

Consider that the average advisor in the wirehouse channel is 51 years old. With a projected retirement age of 68, approximately 8,600 advisors will retire each year for the next 13 years, Cerulli projects. Much like their counterparts in the RIA model, these advisors are increasingly concerned with succession issues such as creating legacy businesses, ensuring that their clients (and their clients’ heirs) will be taken care of after they retire and positioning their teams to attract the next generation of investors.

As they near their own retirement, succession planning is prompting these advisors to consider how they can start enjoying the considerable success they’ve achieved over their careers. Lifestyle is quickly becoming as important as the ability to monetize a book of business in their decision to move to an independent channel. Recently, we’ve seen advisors launch the next phase of their careers in one of these two ways: going independent with a team or joining an existing RIA or consolidator.

Many are going fully independent with their successors joining them in the move. This option is popular with advisors who have already identified younger advisors on their teams as their successors. In fact, the junior advisors on these teams are often the most enthusiastic about moving to the independent channel. For this generation of advisors the flexibility and freedom to choose and use the type of technology they and their clients’ value is critical to their decision process. Additionally, playing an active role in building the new firm creates a critical cultural link between these future and senior leaders.

For other advisors, a soft landing approach—joining an existing RIA or working with an RIA consolidator—may be the best path to independence. This is especially true among those who may not have internal succession candidates in place, but who still want to gain more freedom and flexibility to serve their clients. Breakaway advisors that join RIA firms, for example, can immediately tap into existing infrastructure as well as a range of product options and support (in areas like technology and compliance).This existing structure can make the transition easier and gives the breakaway advisor more functionality, choices and flexibility to grow right away.

Why Move Now Why should those wirehouse advisors make the move now? There are two primary reasons:

1) Wirehouse Financial Incentives May Be EndingMany advisors at wirehouses today who are over 50 will see their current retention packages end soon. Cerulli Research estimates that 37% of wirehouse and regional retention deals will expire during the next three years. The financial services world has fundamentally changed since the last time they signed a retention package. Rather than automatically signing up for another multi-year contract that ties them to their current firms, these advisors are more actively exploring their options. The range of options for independence makes it easier than ever to transition to the RIA model.

Recently, wirehouses announced initiatives aimed at increasing the economics of their own succession plans. While these changes are clearly in response to the flow of advisors into the independent space, they generally fall well short of the economics most advisors will realize from making the move to independence. Both of these trends are making the move to independence far more financially feasible.

2) Senior Wirehouse Advisors Want More BalanceMany experienced highly successful, wirehouse advisors have worked hard to build successful businesses. Now they’re thinking about what they want the next stage of their lives to look like. While they continue to focus on how best to serve clients, the control and flexibility available to them in the RIA model can be an attractive way to achieve a better work-life balance.

Change Starts Now

Wirehouse teams thinking of building an RIA from scratch may first want to consider seeking assistance to create a strategic action plan. Starting a new RIA has many considerations so tapping the right resources to build a project plan will help to create a seamless transition.

When making the decision to join a firm, senior wirehouse advisors may benefit from working with experienced matchmakers.These professionals can identify potential RIA partners that would be an ideal fit and make the necessary introductions so the stakeholders can explore partnership options. Firms like ours that have deep, long-standing relationships with a wide variety of strategic partners and existing RIAs can add tremendous value to the process of finding the right successor and ensuring a smooth process.

The traditional reasons for independence — such as greater control and potential for higher incomes — will continue to be important drivers in the growth of the RIA model.

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Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Charles Schwab & Co., Inc. (Schwab). Independent investment advisors are not owned, affiliated with or supervised by Schwab.